Stock Market Slowly But Surely Unwinding.....

Stock-Markets / Stock Markets 2010 Mar 27, 2010 - 06:14 AM GMT

No real follow through again today by the bears after yesterday's reversal stick. The market is trying to find a way to unwind those overbought oscillators without creating too much price damage within the major indexes of the market. So far so good, but by no means does the selling have to be over nor by no means does it mean we have to have a lot more either.

All of the major index charts have seen the RSI's fall below 70. Some even in to the upper 50's now with the average being roughly 63/64. Stochastics have fallen as well and now, if we turn to the 60-minute charts, they're actually closer to oversold. No guarantee but this S&P 500 1151 is trying to force itself to hold as rock solid support for this pullback, although a breach wouldn't be disaster to the bulls, by any means. The most important aspect of today's action was the more bullish nature of this pullback, which was to keep selling in line with a normal period of digestion after a move higher that took us in to very overbought territory.

We started the day with unexpected gains after the reversal that took place late yesterday. I warned not to get aggressive chasing the move higher based on that reversal and that upside wouldn't be easy. As the day wore on the rally wore out but nothing bad at all. Sure it went slightly red in the end on the Nasdaq, but the Dow and S&P 500 were fractionally green. Nothing bad here. Volume was light. No real sustained selling pressure at all. Almost as if the bulls said be my guest and unwind things, please. We need to still be cautious here as today could just be a precursor to more selling to unwind. The bottom line today was not a bad day for the bulls overall.

What will be most interesting is how the market reacts to the earnings season coming upon us shortly. Stocks have been rewarded for their earning reports a few months back, but now those stocks are more mature or full. The question being, will they be able to produce top line growth by having actually increased their earnings through the selling of their products, or will the increase once again be through trimming worker hours and/or layoffs. If it's the former of the two they will probably continue higher, but if not, they are likely to get smoked. No more free rides. Put up or get slammed.

Some companies are reporting already, although it’s a small number for now. It seems some companies are growing their earnings through product growth. A good sign, and so far, some have gone up on that news, others have gone down. If earnings come in without much growth it is likely the bull will have ended. It will be a critical time for this market and the time is approaching soon.

When a market is more mature the tendency is to watch for how individual stocks are setting up in their patterns.

Are the patterns tired and starting to break or are they still finding a way to hold on?

A lot of stocks have broken out a few times already after moving up, basing, and then breaking out again. Many stocks are still doing that, and when we scan the market we still see loads of set-ups all over the place. The sign of a still healthy market.

The red flag gets raised when some stocks start to break lower than the pattern suggests would still be considered healthy for continued upside. Stocks are pulling back off of overbought on light volume in a controlled manner. No big thrusts lower on increasing volume, etc. You must always play the hand being dealt and not wonder if it's too much already. we all think of that to some degree, I'm sure, but the bottom line is to play it as it's set up. There are still a high enough number of disbelievers out there to allow these patterns to play out with further gains down the road.

Peace

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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